I work as a Research Scholar at the Center for Health Policy and Inequalities Research at Duke University. I also am an Adjunct Scholar at American Enterprise Institute and Mercatus-Affiliated Senior Scholar. Having been trained in policy analysis at the Pardee RAND Graduate School, I have decades of experience in evidence-based health policy at the federal and state level, specializing in health services regulation and the social burden of illness. I've taught health policy and the politics of health care in the Terry Sanford Institute of Public Policy, the Duke School of Medicine and the Fuqua School of Business at Duke. My latest book is "American Health Economy Illustrated."

The author is a Forbes contributor. The opinions expressed are those of the writer.

The Cost of Health Care: 1958 vs. 2012

Mark Perry has posted some interesting comparison of how prices have plummeted between 1958 and 2012 when measured in terms of the hours of work required to purchase items. He concludes that today’s consumer working at the average wage of $19.19 would only have to work 26.6 hours (a little more than three days) to earn enough income ($511) to purchase a toaster, TV and iPod. The equivalent products (in terms of their basic function, not their quality) would have required 4.64 weeks of work in 1958. In short, the “time cost” of these items has massively declined by 86% in less than 5 decades.

Similarly, Perry calculates that measured in the amount of time working at the average hourly wage to earn enough income to purchase a washer-dryer combination, the “time cost” of those two appliances together has fallen by 83%, from 181.8 hours in 1959 to only 31 hours today.

What if we applied this kind of analysis to health care? The results are quite interesting. In 1958, per capita health expenditures were $134. This may seem astonishingly small, but it actually includes everything, inclusive of care paid for by government or private health insurers. A worker earning the average wage in 1958 ($1.98) would have had to work 118 hours—nearly 15 days–to cover this expense. By 2012, per capita health spending had climbed to $8,953. At the average wage, a typical worker would have to work 467 hours—about 58 days.

In short, while time prices for other goods and services had shrunk to less than one quarter of their 1958 levels, time prices for health care had more than quadrupled!

Of course, health care in 2012 is vastly different and greatly improved compared to what was available in 1958. But the same can be said of other goods and services (Perry, for example, is comparing the cost of an iPod to 4-speed automatic record player).[1]

This simple comparison reminds us of three basic truths. In general, private markets tend to produce steadily lower prices in real terms (e.g., in worker time costs) and steadily rising quality. This is exactly what we observe for goods such as toasters, TVs, iPods, washers and dryers. In contrast, while the quality of health care unequivocably has risen since 1958, real spending on health care has climbed dramatically. This isn’t an apples-to-apples comparison insofar as the bundle of goods and services that constitute health care is also much larger today than in 1958. In contrast, even though the quality may be better, a washing machine in 2012 is still a washing machine.[2] If we were willing to rely more on markets in medicine, we might be able to harness the superior ability of Americans to find good value for the money to produce results more similar to other goods.

Second, over time, we as a nation have been able to afford more health care precisely because the time cost of other goods and services has declined. For the same number of hours worked, workers can enjoy the same standard of living even as they allocate more of their working time to purchasing health care. There is nothing wrong with this. The only issue is whether we are getting good value for the money when we buy health care. With only 11 cents of every health dollar paid directly out-of-pocket, I think most of us can honestly say “no.”

Anyone who is skeptical on this point should do the following mental experiment: if I promised to pay 89 percent of the cost of your groceries, would what you buy be different? Most students I ask freely concede that they would buy things they would not otherwise buy and might well pay higher prices even for things they would have bought anyway. The difference between the cost of your weekly groceries when you buy them with your own money (say, $100) and what you spend when someone else is paying most of the bill (say, $150) is not pure waste. There is some added value to you from those extra groceries. But that value cannot exceed the added cost else you would have bought them on your own in the first place. The difference between that added cost and your own estimate of the added value is what an economist would call waste. According to the Institute of Medicine, we wasted about $765 billion in health care in 2009—about 30 percent of all spending.

Finally, this rate of increase is not sustainable. The time price of health spending cannot quadruple again over the next half century, else the average worker is likely to experience a decline in his or her real standard of living (i.e., what can be afforded after paying for health care). To paraphrase the former president of AEI, “we cannot make health care affordable by picking each other’s pockets.”[3] The sooner policymakers recognize this basic truth, the sooner we can get on a path towards sustainable growth in health care expenditures.

Update 1

Sarah Kliff had a nice follow-on piece in the Washington Post that elaborates on my chart and some possible explanations for why consumers are so much less cost conscious in health care.

Footnotes

[1] As well, one could argue that the average worker does not purchase the average per capita amount of health care since there are all sorts of cross-subsidies created by private and public insurance as well as U.S. tax policy. But at the end of the day, today’s health spending is financed by today’s workers, so if anything, the very rough picture I’ve provided is overly optimistic. On a per worker basis, total U.S. health spending this year will amount to $21,280, which would require an average-paid worker 1,108 hours of work to finance (and even more when taxes are taken into account). In reality, there are few U.S. workers who have to devote more than half a year to bankrolling their health care. The average hourly earnings figure I am using is only for production and nonsupervisory employees in manufacturing. Many other workers, including those in management and entrepreneurs, do not earn an hourly wage. And the costs of government-financed health care—which now accounts for more than 60 percent of health spending—tends to be borne more by those with the highest incomes.

[2] In fairness, when health economists have tried to measure the real prices of health treatments such as for heart attacks, they sometimes have found these have declined, though not nearly as rapidly as the decline in prices for goods and services analyzed by Perry.

[3] The original quote, from Christopher DeMuth, was “we cannot all grow wealthier by picking each other’s pockets.”

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This is very true and Harvard health economist David Cutler did a very interesting study that compared gains in life expectancy to the extra money we’ve spent on health care since 1960. He concluded that on average, the extra money was well worth it: for example, among newborns that extra spending saved lives at a cost of less than $40,000 per added year of quality-adjusted life. Given that we spend $75,000 a year to keep Medicare patients needing kidney dialysis alive, spending less than $40,000 for one extra year of life is a great bargain.

However, Cutler’s figures do NOT imply that we could not have done much better or that every dollar of health spending provides at least one dollar’s worth of value. Indeed, he argues that perhaps a third of spending is wasted (this is consistent with the IOM’s recent report). So the challenge in addressing health spending is how to cut what’s wasteful from what’s necessary and worthwhile.

Your analogy about products getting better isn’t exactly truthful. They are built to be prettier and more convenient but not necessarily better. My parents still own a refrigerator built in the 50′s which still works! Back then products were built to last, now they are built to fail so you have to buy another. Razors and tires are two products where the technology is there to easily be make them last longer but in doing so will ruin their market so they obstain.

Health care is expensive because we don’t pay for health care itself. We pay for everyone else to line their pockets. We pay for the health insurance industry and it’s corporate profits, malpractice insurance, lawyers getting 40% of those lawsuits (due to their own pain and suffering of course), and people looking to win the suing lottery. Doctors need to be able to practice without fear and that alone would save billions. We need massive health care reform and it needs to be about getting people health care rather then about corporate greed. How does the UK spend significantly less of the gdp on health care and cover absolutely everyone?

Hmmm. Average life expectancy of refrigerators and dryers is 13 years, according to National Association of Homebuilders, and comments at this site suggest that many homeowners experience much better life expectancy than these figures. http://news.consumerreports.org/home/2009/03/appliance-life-expectancy-national-association-of-home-buildersbank-of-america-home-equity-study-of-.html So maybe things lasted longer when I was a child, but my guess is that considering the whole package–life expectancy, functionality etc.–most consumers would choose a 2012 refrigerator, dryer or washer over their 1958 counterparts.

As for corporate greed, profits in the health industry amount to about 1 percent of all spending. In my state, were the CEO of the largest health insurer to work for free, it would save the average plan member $1 a year. Is corporate greed more significant in health care than in the food industry? If we can trust private markets to deliver high quality food at an affordable price, it’s not clear why we cannot do the same for health care. Medical care surely is no more of a necessity than food is.

As for the UK, I’ve estimated that relative to other major industrialized nations, it spends about 20 percent less than it should given its per capita income. In short, the NHS rations care in ways that likely wouldn’t be acceptable here. To take one example, the threshold for determining what procedures the NHS will pay for is $50,000. If we accepted that threshold in this country, we would refuse to pay for kidney dialysis for many millions of Medicare patients who have end-stage renal disease [I have pointed out in another post that annual costs of dialysis are about $75,000 a year. I presume you realize that without dialysis, such patients would die very quickly]. In short, I don’t think the UK offers us a magic bullet, nor vice versa.

This was a pretty good piece that got close to the actual problem without quite saying it aloud. The word missing is MONOPOLY. There are no real competitive markets in healthcare. Just about every sector, supplier, provider, insurer or whatever in healthcare is either no competition, or very limited, managed competition. All the organizations for the various sectors are focused on keeping competition out of their sector.

What it boils down to is the gatekeeper structure put in place to control costs has become the healthcare industry’s best method of communicating costs and pushing up the costs without equivalent increase in service (call it inflationary). All costs and expected charges/revenues are pushed up the chain and around the horn until all pricing/cost information arrives at the insurer where some standard negotiation nets a contract and the insurer knows pretty well what their expected costs (payouts) will be the next year and what the premium will be. You notice that the insurers don’t lose money. The structure works as a great funnel to the insurers so they have all known information before committing themselves.

The original idea of controlling costs has become secondary and more perfunctory, plus the hospitals and doctor organizations have figured out how to push back in the contracts and the insurers have found a level they can work around. So it’s submit your data, somewhat padded of course, you get back a response with a lower amount and information from the insurance company that others in your area of operation are requesting other amounts. A little back and forth and voila’, out comes a contract that tries to cut some of the padding, but is very careful about cutting too much. We don’t want anybody getting hurt.

The insurers have their anti-trust exemption. The hospitals have found it more powerful and profitable to form regional monopolies to increase their power for demanding more from the insurance companies. The various Medical Societies also have their input to doctors performance and pricing and the doctors are starting to band together for more.

Dear sir, i maintain that the Perry analysis is misleading, inasmuch as it tries to show that the worker today is better off economically vs the one in 1958 while ignoring purchasing power over the period. The same Ipod, inflation adjusted, would have costed 25$ in 1958. The analysis is overly optimistic about the situation of today’s workers.

With regards to healthcare, how can we compare 1958 and 2012 in such a simplistic manner without considering the technology and innovation that has occurred. And to presume that private sector is a better innovator is rather contradictory because government tries to distribute services bought from private sector it does not manufacture of itself. it would be better to say Government is an inefficient distributor by not pushing private sector for lower prices.

Using a flawed analysis in order to drive home an argument that the worker today can pay more out of pocket for healthcare and that this would drive healthcare costs down is questionable and frankly sounds like a political agenda rather than an unbiased commentary.

If the time cost of everything has gone down in the way that it has for washers, dryers, record players etc., then the average worker IS better off than a half century ago–especially if the quality of these products has also improved.

The comparisons provided are intended to be very rough, not exact. You’re right that many things are changing, including quality improvements related to innovation. And that certainly accounts for at least some of the increase in the time costs of health care over decades. But at least some comes from lack of cost conscious behavior by consumers. The RAND Health Insurance Experiment was a scientific experiment that demonstrated conclusively that patients who were given completely free medical care had health costs that were nearly 50% higher than those in what we today would call high-deductible health plans. http://www.rand.org/content/dam/rand/pubs/research_briefs/2006/RAND_RB9174.pdf

Finally, in some parts of the health system, government IS the producer. More than 1 in 7 hospital beds, for example are publicly owned (by cities, counties, states or federal government). This is higher than the share of beds in for-profit hospitals. Several studies have confirmed that quality of care is worse in public hospitals even after taking into account the mix of patients that they serve. http://users.soe.ucsc.edu/~draper/keeler-etal-1992.pdf

Often, opinion pieces comparing middle class life in the 1950s with life today are not dispassionate analyses of representative factual data, but instead are affective utterances intended to further one public policy or another. As a push back against a statement by Paul Krugman, Donald Boudreaux yesterday wrote an article on how many fewer hours today’s worker has to work than did the 1950s worker, to buy a lawn mower, presuming to show that the 1950s middle class was better off than todays. An unbiased analysis of the quality of life would take into account all the major expenses of a household, including housing and college tuition, and would address not just income and expense, but the environment, both social and physical, for different locales. Just one example – an apartment in Berkeley California rented in 1958 for $135 per month. A college student could make $2.00 an hour for part time work. On October 19, 2010, that same apartment was advertised for rent at $2,250 per month. The corresponding wage would be $33.33 per hour – actually, more, because payroll taxes are much higher today.

One reason health care has zoomed up 4 times higher than when I graduated college in 1958 is over-treatment and faulty diagnosis. In other words, while the common man is smarter because of higher education than those living in 1958, the doctors aren’t. Many are just plain stupid when it comes to over testing and applying caution to a patient. Like one doctor we knew who was an honest and upright person in every other way, but when it came to his pocketbook he had a tendency to want to keep people in the hospital needlessly just to make sure no one sued him–or was it to earn some extra bucks? I’ll leave that up to you. The best thing we can do is continue to educate ourselves, and often that doesn’t require a doctor. i just put up an outstanding link blog that contains maybe 160 links to various ezines and websites with articles in info on almost all aillments. Try it. https://sites.google.com/site/healthsitelinks/

It would be more interesting to plot the same increase in costs against the percentage of total costs paid by government.

I wonder if it would illustrate the issue of government efficiency?

I also wonder about unfunded liabilities. In the private carrier world, estimates are made and reserves accumulated to pay for IBNR and future claims during the coverage term. Medicare/Medicaid does not do this. This makes the any comparison difficult to measure.